SECURITIES ACT OF 1933
Release No. 8272 / August 22, 2003
SECURITIES EXCHANGE ACT OF 1934
Release No. 48391 / August 22, 2003
ADMINISTRATIVE PROCEEDING
File No. 3-10587
In the Matter of JOHN F. SMART, Respondent. |
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ORDER MAKING FINDINGS, IMPOSING REMEDIAL SANCTIONS, AND IMPOSING A CEASE AND DESIST ORDER |
I.
On September 26, 2001, the Securities and Exchange Commission ("Commission") instituted a public administrative and cease-and-desist proceedings, pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Sections 15(b), 19(h) and 21C of the Securities Exchange Act of 1934 ("Exchange Act"), against Respondent John F. Smart ("Smart").
In response to the institution of these administrative proceedings, Respondent Smart has submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, and without admitting or denying the findings contained herein, except as to the Commission's jurisdiction over him and over the subject matter of these proceedings and those contained in paragraph II.A. below, which are admitted, Smart consents to the issuance of this Order Making Findings, Imposing Remedial Sanctions, and Imposing a Cease and Desist Order ("Order").
II.
On the basis of this Order and the Offer submitted by Smart, the Commission makes the following findings:
A. Smart, age 61, is a resident of Creamery, Pennsylvania. During 1999, he was the branch manager and sole employee of a branch of a broker-dealer registered with the Commission. This branch office was located in Smart's home. Smart has been licensed by the NASD since 1982 and currently possesses Series 6, 22 and 63 licenses.
B. During several months in mid-1999, Smart engaged in a fraudulent offering scheme targeted against three nonprofit and/or charitable institutions (the "charities"), including a church, a religious-based family crisis center and a substance abuse center. These charities were located in southeastern Pennsylvania and southern New Jersey. Essentially, Smart offered these charities an opportunity to obtain between $5 million and $9 million each by jointly participating in an alleged $15 million bond offering. This offering possessed many of the indicia of a prime bank fraud. However, Smart did not raise any funds from these charities.
C. Smart promoted this bond program in personal meetings with the charities, where he distributed a sales brochure; in telephone conversations with representatives of the charities; and, in at least one instance, through the mailing of a sales brochure.
D. While the details varied somewhat, there was a general pattern to Smart's activities. Smart told the charities about a supposedly unique and secretive fund-raising program involving a charitable trust located in Switzerland, or elsewhere in Europe, and a top 200 World Bank.
E. Smart informed the charities that a 100 year-old trust, named the Premier Trust, possessed $3 billion in assets and raised money for charities and itself through the issuance of bonds. These bonds allegedly were "5 year, AA rated" bonds earning 8 to 9 percent interest and were guaranteed by a top 200 World Bank, a major insurance company and/or U.S. Treasuries. The amount of the bond offerings were typically $15 to $50 million
F. According to Smart, the Premier Trust would supposedly issue the bonds on behalf of the charities. However, the charities would not immediately receive the proceeds from the offering. Instead, the proceeds from the bond offering would be placed into a trading account maintained by or on the behalf of a European bank. The bank could then leverage these funds at 10 times their face value in credit facilities, overnight trading and short-term loans in much the same way that U.S. banks can leverage money obtained from the U.S. Federal Reserve. By leveraging these funds, the banks could purportedly earn interest on a principal amount 10 times greater than the funds actually possessed.
G. Smart claimed that the banks, through this leveraging and trading, could generate enough profits: (i) to pay the principal amount (i.e. the face value of the bonds) to the charities; (ii) to repay the bond investors, possibly the Premier Trust, their entire investment plus a reasonable rate of return; and (iii) pay the promoters of the program a fee equal to 10 percent of the offering. One of the purported advantages of this program was that it was a private offshore investment, which did not involve the Internal Revenue Service or the Commission.
H. Smart told each of the charities that to participate in this program, it had to submit a business plan to the promoters. If a charity were accepted into the program, it would then receive a letter of commitment. At this point, the charity would be required to pay a $50,000 application fee. Smart proposed that the three charities split the $50,000 application fee and then share in the $15 million bond offering on a pro-rata basis. Nothing else was supposedly required of the charities to receive their funds.
I. Smart either knew or was reckless in not knowing that his representations and the brochure contained materially false and misleading statements. In fact, virtually every material statement Smart made to the charities was untrue. There is no evidence that the Premier Trust actually exists. Further, the bank trading program, which Smart explained would generate the necessary profits, has the elements of a prime bank scheme, which is widely recognized as a fraudulent scheme characterized by claims of fantastic profits which can be obtained from trading non-existent banking instruments on the international market.
J. Smart offered the charities, through his verbal and written representations, the opportunity to purchase a security, namely an investment contract, in exchange for the payment of $50,000.
K. Because Smart was making these offerings outside of the supervision and control of the broker-dealer for which he worked or any other registered broker or dealer, he was himself acting as a broker or dealer while not being registered under Section 15 of the Exchange Act.
L. Based on the above-described conduct, Smart willfully violated and committed and caused violations of:
Sections 17(a)(1) and 17(a)(3) of the Securities Act in that he, in the offer or sale of securities by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly, employed a device, scheme or artifice to defraud, or engaged in a transaction, practice or course of business which operated or would operate as a fraud or deceit upon the purchaser; and
Section 15(a)(1) of the Exchange Act in that he made use of the mails or the means or instrumentalities of interstate commerce to effect transactions in, or to induce or attempt to induce the purchase or sale of the securities described herein without being registered as, or associated with, a broker or dealer registered with the Commission pursuant to Section 15(b) of the Exchange Act.
III.
On the basis of the foregoing, the Commission deems it appropriate and in the public interest to accept the Offer submitted by Respondent Smart and imposes the sanctions specified therein.
Accordingly, it is hereby ORDERED that:
A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, Smart shall cease and desist from committing or causing any violations and any future violations of Sections 17(a)(1) and 17(a)(3) of the Securities Act and Section 15(a) of the Exchange Act;
B. Pursuant to Section 21B of the Exchange Act, Smart shall pay a civil penalty of $10,000 to the United States Treasury; $5,000 of which shall be paid within 5 days of the entry of the Order and $5,000 of which shall be paid no later than six months after the entry of the Order. Such payments shall be: (a) made by United States postal money order, certified check, bank cashier's check or bank money order; (b) made payable to the Securities and Exchange Commission; (c) mailed to the Comptroller, Securities and Exchange Commission, 6342 General Green Way, Suite B, Mail Stop 0-3, Alexandria, Virginia 22312; and (d) submitted under cover letter which identifies Smart as the respondent in this proceeding, as well as the Commission's case number. A copy of the cover letter and money or check shall be sent to Arthur S. Gabinet, District Administrator, Securities and Exchange Commission, The Curtis Center, Suite 1120 East, 601 Walnut Street, Philadelphia, Pennsylvania 19106; and
C. Pursuant to Section 15(b)(6) and 19(h) of the Exchange Act, Smart be, and hereby is, barred from association with any broker or dealer with the right to reapply for association after one year to the appropriate self-regulatory organization, or if there is none, to the Commission.
By the Commission.
| Jonathan G. Katz Secretary |